If you’re a new business owner in Washington State, the gross receipts tax (also known as “Business & Occupation tax” or “B&O tax”) you pay can seem a little tricky to understand. So for people new to business ownership, I want to provide a really quick overview of the basics.
Are You Subject to Washington B&O?
You are subject to B&O if you operate a business in Washington State. You pay the tax for the privilege of doing business in Washington State.
And a follow-up point, the state learns about your operating a business because you apply for a master business license with the state’s Department of Revenue. In fact, the master business license process should perhaps be retitled “sign up to pay business and occupation taxes”.
How Does the B&O Tax Work?
The Washington state business & occupation tax works really simply. And that’s an advantage that is often ignored.
Mechnically, you simply pay a percentage of your gross receipts. Commonly, the percentage runs about .5%, or half a percent. But service businesses pay a 1.5% rate. And some businesses pay lower rates. (Click here to see the Department of Revenue’s current list of business and occupation tax rates.)
Example: If you operate a small professional services firm (say a consultancy) and the firm grosses $200,000 in revenue, you will owe 1.5%, or $3,000, in business and occupation taxes.
If you run a $1,000,000 manufacturing or wholesaling firm, you will owe .484%, or $4840, in business and occupation taxes.
Are There Deductions for B&O Tax?
You pretty much pay B&O on all your net in-state revenue. So that means you only get to deduct returns, “never collected” money and out of state sales.
Example: If you run a business that generates $1,000,000 in revenue but $200,000 of this revenue gets earned in California and $100,000 gets earned in Oregon, Washington state can probably only tax you on the net $700,000 of Washington state revenue.
Example: If you have to return $50,000 of your Washington state revenue due to a customer dispute and you end up not collecting another $25,000 of your Washington state revenue because a customer simply can’t pay, you will end up paying taxes only on about $625,000 of Washington state revenue.
If you want more information about how to take advantage of these tax saving gems, consider our popular downloadable ebook “Small Businesses Tax Deduction Secrets“.
Also note this: If you’re a client of our CPA firm, you shouldn’t purchase any of our e-books. Just call us and ask for your complimentary copy.
But note that (surprisingly) you can also pay B&O on things that aren’t really revenue. For example, in some cases, if you’re a partner in a business, though the partnership pays B&O on its revenue (because the partnership is running a business), if you receive part of your income in the form of a guaranteed payment from partnership, you may also need to pay B&O taxes on that.
Another example: Until October 1, 2013, a common paymaster arrangement in the state’s eyes created “fake” revenue the state thought it should be able to tax. (For more information about this recent rule change, refer here.)
Are There Credits for B&O Tax?
If you’ve got a service business doing less than about $56,000 in annual revenues or a manufacturing or retail business doing less than about $170,000, you can take a small business B&O tax credit to eliminate the B&O tax.
If you’re running a service business that does between (roughly) $56,000 and $112,000 in annual revenues or a manufacturing, wholesaling or retailing business that does between (roughly $170,000 and $340,000), you get a small credit that will wipe out part of the B&O tax you pay.
Does Rental Income Get Taxed?
While real estate investors commonly think about their rental property investments as a business, one thing to know is rental income is generally not subject to Washington state business & occupation tax.
This exclusion applies to rental arrangements where a landlord rents to a tenant for 30 days or longer.
By the way, this means you are liable for B&O taxes on a nightly or weekly rental–such as a hotel or weekly vacation rental. (This would obviously include something like an AirBnB business.)
Also, since we’re on the subject, you should that a handful of other requirements need to met, too. The tenant must get exclusive use of the property, have the exclusion right to continuous possession, and the truly have control over the space.
We’ve got lots of resource available for these investors at the blog here.
And we’ve also got a downloadable reference many new real estate investors will find invaluable, our $40 “Real Estate Tax Loopholes and Secrets” e-book.
When Do I File a Washington State Business & Occupation Taxes Return?
The deadlines for filing a B&O tax return vary depending on the size of your business.
For starters, if you’re not collecting sales tax and your revenues fall under a specified threshold ($28,000 for most businesses) you don’t need to file a B&O tax return at all.
If you exceed this threshold, you file either monthly, quarterly or annually. Specifically, if you’ll owe more than $4800, the state wants monthly returns (due by the 25th of the next month). If you’ll owe less than $1050, you owe an annual return (due by the 31st of January). Everyone else needs to file quarterly B&O tax returns (due by the last day of the month following the quarter’s end).
One other quick note: If you owe a monthly B&O tax return, you are required to file your return electronically.